New Guidelines To Calculate Base Rate This Week: Rajan

Updated: Tuesday, December 1, 2015, 16:04 [IST]

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Mumbai, Dec 1 (PTI) After goading banks, without much success, to pass on full benefits of policy rate cuts to borrowers, Governor Raghuram Rajan today said the Reserve Bank will this week issue guidelines to determine base rates on a new methodology based on the marginal cost of funds. Also read the difference between Benchmark Prime Lending Rate (BPLR) and Base Rate

"Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 bps has been transmitted by banks. The median base lending rate has declined only by 60 bps since then," he said in the 5th bi-monthly monetary policy review in the current fiscal.

Explaining the rationale of the move, Rajan told reporters during the customary post-policy press meet that "there is a particular way to calculate the base rate now. And our worry is that it should not come in the way of banks to pass through lower lending rates to customers.

"That is why we took a relook at the base rate and are coming to the marginal cost pricing which we will be announced later this week."

Stating that the marginal cost of pricing makes the costs flow through into lending rates faster, Rajan said that "the intent is that banks would be able to make incremental loans on the marginal cost pricing while historical or legacy loans will be on the base rate. That's the intent as we go forward."

Rajan further said the marginal cost of fund calculation offers banks flexibility to move more quickly while the base rate calculated under the average cost will not allow them to do so and react to competition from the markets.

As banks held on to higher lending rates even after the central bank had cut the repo rate twice till March this year, RBI in April suggested the marginal cost as the basis for calculating their base rate, much to the chagrin of bankers who said that the domestic market was not mature enough to adopt such a method as deposits are still priced higher.

In a bid to bring in more transparency in credit pricing, RBI under the past governor D Subbarao had in July 2010 asked banks to calculate their lending rates based on base rates, barring lenders from selling credit below the declared base rate.

Earlier this year, RBI had again asked banks to review their base rates on a quarterly basis.